Canada: Insurance M&A Activity Increases In 2011, But Will The Momentum Continue?

Last Updated: June 29 2012
Article by Philip Heywood and Kaitlin Hogan

Consistent with our expectations, mergers and acquisition (M&A) activity in Canada's insurance industry continued to increase in 2011 as more carriers and brokers sought to expand market share, drive premium growth, and seek economies of scale. A continued low interest rate environment and sluggish improvements in soft premium rates continued to squeeze margins and drive many players to seek scale. If more deals could be found, chances are more deals could have taken place.

According to data obtained from Capital IQ, there were 29 deals announced in 2011 involving a Canadian insurance target, compared to 21 in 2010 and just 12 deals in 2009. The vast majority of announced Canadian insurance deal activity in 2011 was driven by the brokerage and managing general agents (MGAs) sector, with transactions to acquire 23 insurance brokerage and MGA targets announced in 2011 compared to 11 in 2010. Given the size of many broker to broker deals, typically there are many after deals that go unannounced. Interestingly, this spark in activity was ignited by the acquisition of Western Financial Group by Desjardins in December 2010, following which, Western went on to announce a further six acquisitions in 2011. Another serial acquirer in Canada, Hub International, drove a further three brokerage transactions in 2011.

However, the story of the year for Canadian insurance M&A in 2011 has to be the exit of AXA from the Canadian marketplace. Beginning with the sale of multi-line operations to Intact Financial (formerly ING Canada) in May for $2.7 billion and continuing with the sale of its life insurance operations to SSQ Insurance in September, the departure of AXA drove substantially all of the $3 billion announced deal value for Canadian insurance M&A in 2011.

The activity (and pricing) surrounding the departure of AXA is indicative of the pentup demand for quality insurance targets in Canada. Strong balance sheets, surplus capital and capacity and a desire, if not necessity, to build scale is driving demand for premium volume from domestic carriers. However, there continues to be a lack of willing sellers among carriers. Indeed, 2011 saw carriers perusing transactions along the value chain, driving activity in the brokerage sector as they sought to capture premium volume from the acquired distribution platforms. This was recently seen again with the announcement of Intact's agreement to acquire Jevco Insurance Company from Westaim Corp. for $530 million.

Deals in the insurance brokerage and MGA space continue to get done as entrepreneurs and aging owner-managers seek an opportunistic exit to benefit from the strong current demand and pricing.

Valuation trends

The demand for quality insurance targets has driven both competition and pricing to new heights. While typical valuation metrics differ among insurance sub-sectors, there has been a general trend towards higher valuation multiples over the last five years. Pricing is partially a function of the nature of the acquirer and its ability to drive value and collaboration from the deal. For example, a carrier can generally derive greater synergies from the acquisition of an MGA than another broker or MGA could. Therefore, it is often able to offer a higher valuation as a result of these stronger synergies. Due to the demand for premium volume and scale from both brokers and carriers, valuation multiples for insurance brokers are at an all-time high, and many brokers are being priced out of broker-to-broker acquisitions due to competition from large domestic carriers.

Other company-specific, controllable factors will also impact the marketability and valuation of a company in an insurance transaction, including:

  • Quality of historical earnings
  • Strong underwriting results
  • Consistent loss ratio trends
  • Critical mass
  • Strong niche
  • Proprietary technology or analytics

Vendor due diligence, if performed early, can help a seller identify and mitigate factors that could otherwise deteriorate value during a sale, or enhance those factors that will drive premium pricing and strong demand.

Buy Canadian

Interestingly, five of the top six announced Canadian insurance deals by value in 2010 and 2011 were to Canadian buyers, with the sale of the reinsurance operations of Sun Life to Berkshire Hathaway, in October 2010, being the outlier (while RSA Canada's parent company is domiciled in the United Kingdom, given that RSA Canada is a major player in the Canadian marketplace, this has been considered as a Canadian acquisition). The relative strength of the balance sheets of Canadian financial services companies and strong Canadian dollar appears to have kept foreign buyers from pursuing many of the large deals.

Insurance M&A outlook ' What to expect from 2012

We expect M&A deal volume in the Canadian insurance sector to continue to strengthen into 2012. Generally, there appears to be more buyers looking to add scale, diversify into new markets and geographies than there are willing sellers. With investment yields likely to remain low (and therefore asset values relatively high), and premium rates stagnating and continuing to squeeze margins, this phenomenon is likely to continue into 2012. Outside of potentially market changing events, such as demutualization of property and casualty (P&C) carriers (see below), activity is expected to continue to be driven by the brokerage sectors where willing sellers seeking an exit at historically high multiples can continue to be found.

While insurance M&A activity may strengthen in 2012, we expect a number of issues will impact deal activity in the insurance industry, including:

  • Solvency II - Solvency II may increase the amount of capital European insurers and reinsurers are required to hold, making it more challenging for them to compete in the Canadian market. Interest in the Canadian M&A market by European investors appears to be on the decline partially as a result of the uncertainty around whether Solvency II will impact the capital they will be required to hold at their foreign subsidiaries and also as a result of the strong Canadian dollar compared to the euro.
  • Yields likely will remain low in 2012 - The low-interest rate environment will likely continue through 2012. Low yields will likely impact pricing considerations for many insurers that rely on investment returns to drive returns and likely priced policies assuming a greater investment yield. Insurers are evaluating the realistic yields they can earn in the current environment and will likely be evaluating their pricing and growth strategies. This may lead some insurers to exit certain lower-margin or capital-intensive businesses making more properties or blocks of business available to the market.
  • Significant catastrophe-related losses may result in a stabilization of market pricing - P&C rates have been softening over the last few years as a result of excess capacity and relatively low catastrophe-related losses. In 2011, the P&C insurance industry experienced significant catastrophe-related losses as a result of various floods, hurricanes, earthquakes, and tsunamis around the world. Market observers believe that these catastrophe losses will lead to a general stabilization in market pricing. However, the level of the catastrophe losses may not be signifnicant enough to shock the market into price increases. They also believe that a real rate change will not take place until adverse development on reserves from the catastrophic events of 2011 are realized, which is likely to occur over the next few quarters and into 2013.
  • Demutualization of the Canadian P&C insurers - Pioneered by Economical Insurance Group (Economical), proposed demutualization could lead to opportunities for private equity players to deploy capital. In 2010, Economical, one of Canada's largest P&C insurance providers, announced its intention to demutualize. Its announcement provided two options for demutualizing, either through an initial public offering or a sponsored demutualization, with a financial sponsor providing the required financing and acquiring a significant proportion of the company. Although there have been many life insurance demutualizations in Canada in the past 20 years, there is currently no legislative framework for the demutualization of a P&C writer. Economical is in consultation with the Office of the Superintendent of Financial Institutions (OSFI) and the Department of Finance on the construct of such a process. Other large mutual P&C writers are on the sidelines waiting for the Economical demutualization ' expected to be completed in 2012 ' to pave the way. As the regulatory framework is finalized, and others follow Economical on the path to demutualization, there could potentially be increased demand for financial sponsors' capital and increased consolidation in the Canadian P&C market as demutualized companies with new found access to capital look to build scale and efficiency.
  • US insurance companies have largely recovered from the financial crisis and are looking to put their excess capital to use - Many US and foreign insurance companies have recapitalized over the last several years and have begun to return some of the excess capital to shareholders through stock buybacks and, to a lesser extent, through dividend increases. Insurers will be evaluating whether to continue returning their excess capital to shareholders or to put their capital to use by expanding their core business though M&A.
  • Uncertainty surrounding legislation and federal regulation in the US will continue to create hesitancy in 2012 for US buyers - This uncertainty could also have a significant impact on offshore property-casualty reinsurance strategies and offshore reinsurers. Further US health care reform could have a big impact on accident, health, and life insurers, and other writers of related workers' compensation, long-term disability, or long-term care products. The impact of health care reform is far from over and the oversight of the Federal Insurance Office is expected to have further implications on life insurance operations and costs in the US.

Top considerations for insurance dealmakers

Below are key considerations dealmakers should consider in deciding whether a transaction is the best vehicle to meet the organization's objectives.

1. Be mindful of valuation gaps. What can be done to build confidence on both sides of the negotiating table so that any valuation gap can be closed? This is particularly important in the insurance industry where interest rates are likely to remain low, impacting investment returns and potential profitability. Valuation gaps due to differences in expectations of future profitability can be sizeable and can make it hard to agree not only on pricing but also on how the deal should be structured.

2. Consider the impact of mediumterm interest rate trends on projected earnings. With interest rates likely to remain low for the foreseeable future, insurers cannot count on squeezing returns out of a bad deal from rising rates. They have to make certain that their assumptions accurately project margins and interest rate spreads, the latter of which is a strong contributor to earnings in the P&C sector.

3. Consider the effects of recent and expected legislation. Especially with the upcoming presidential election in the US, there is increased uncertainty about both legislation that has already been enacted in the US and bills that might still be introduced. Changes to US health care reform could affect future partnerships, alliances and joint ventures in the health, life, workers' compensation, disability, and longterm care sectors. A proposal in President Barack Obama's budget to eliminate the tax ductibility of some reinsurance premiums could affect offshore property and casualty reinsurance strategies.

4. Carefully consider potential implications of anticipated and recently implemented regulatory reforms. Regulatory changes in the US and Europe could have a dramatic effect on valuation. How might a transaction affect the capital ratios of European insurers and their Canadian subsidiaries under Solvency II? Will acquirers have to increase the amount of capital they are required to hold, tying up so much that a deal becomes financially unworkable?

5. Anticipate points of resistance. An acquiring firm needs to understand what impact a transaction would have on the insurer's relationships with regulators, rating agencies, bondholders, shareholders, and other stakeholders. Some transactions simply may not be worth the price a company has to pay in reputational or relationship damage.

6. Evaluate transaction alternatives. An insurer may be able to more efficiently diversify its distribution and revenue stream through other measures which may organically generate desired growth ' engaging in loss portfolio transfers participating in renewal rights transactions, or simply hiring highperforming employees. Insurers might also want to consider deploying capital through avenues that provide greater certainty in improving return on equity such as stock buybacks or increasing the dividend, rather than entering into what may result in a risky transaction which may not result in the intended increase in return on equity.

7. Identify both strategic and financial advantages. The best deals not only generate incremental returns but also strategic advantages. Good partners have distinct competitive advantages, expertise, or product niches that cannot quickly and efficiently be developed internally or economically obtained through other strategic alternatives. For example, some distressed firms are seeking to sell off non-core businesses and assets, which would make a deal a win-win. If this is not the case, then the deal may result in higher costs for little additional business or financial gain, especially if it means entering a new area when the market outlook is still ambiguous or an area where the buyer has little or no experience or the ability to drive synergies.

8. Assess the impact on the insurer's risk profile. If the risk profile changes, an acquirer should make certain that there are business methods, controls, and processes in place that can be used to identify and mitigate the new risks posed by a transaction. In particular, it needs to make certain that its enterprise risk management system is up to the task of evaluating and addressing the added risk.

9. Look for a good fit in people, culture and systems. Buyers need to ascertain whether they can easily integrate a prospect's operational technology and human assets. Companies sometimes will buy a firm while falling to realize how difficult it can be to absorb. Differing business cultures, back-office systems, and infrastructure can result in much higher integration costs than expected or even cause a deal to fail outright.

10. Evaluate how industry trends may affect the viability of the deal. Trends in premium rates, combined ratios, excess capacity, and a residual soft market could force industry consolidation of underwriters. These trends might increase interest in vertical acquisitions of managing general agents, managing general underwriters, or captive agents or might make certain horizontally structured deals more or less attractive.

Properly performed, initial due diligence of the considerations above could curtail a poorly conceived deal early in the process, saving time and money. For transactions that make sense, working through these scenarios offers advantages in meeting the complex integration of operational, valuation, accounting, and technology requirements after the deal closes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions